By Chris Dorrell
Markets managed to shrug off turmoil in the banking sector to finish the day higher despite huge turmoil in the financial sector.
The FTSE 100 closed 0.93 per cent higher at 7,403.85 points, while the domestically-focused mid-cap FTSE 250 index, which is more aligned with the health of the UK economy, climbed 0.13 per cent to close at 18,495.13 points.
In France, the CAC climbed 1.28 per cent while Germany’s DAX rose 1.04 per cent.
Having opened the day significantly lower, banks in Europe recovered across the board with many even posting gains.
UBS finished the day 1.5 per cent higher, having traded over 10 per cent down earlier in the day.
Elsewhere in Europe, BNP Paribas rose 1.9 per cent, Santander climbed 2.5 per cent, UniCredit rose 2.4 per cent. Deutsche Bank, however, bucked the trend falling 0.8 per cent. The Stoxx 600 banking index climbed 1.2 per cent.
Things were worse in the UK, where Barclays fell 3.1 per cent and Lloyds was down 0.3 per cent. HSBC and NatWest both fell 0.1 per cent.
There had been concerns earlier in the day after Credit Suisse’s alternative tier 1 (AT1) bondholders were wiped out in the merger with UBS.
Traditionally bondholders are higher than shareholders in the hierarchy to receive compensation if a bank goes bust. Reversing the hierarchy risked increasing bank funding costs by making bond investments more risky.
But after reassuring statements from boththe ECB and the Bank of England, markets started recovering.
Analysts also stressed that Credit Suisse’s problems were unique and should not pose a risk to wider financial stability.
“Credit Suisse is a somewhat isolated case, within the broader European banking sector. European banks have strong capital requirements and perform well under stringent stress tests,” Tom Rivers, head of investment strategy at Cardano, said.
However, they also warned that it was too early to suggest the problems in the banking system had been solved.
Banks rely on investor and depositor trust, Rivers said. “Where this is fragile, we cannot discount the possibility of further contagion.”
Similarly, Finalto’s Neil Wilson said “it is too early to say for sure that things have meaningfully stabilised. It stops once investors stop wondering who’s next.”
Banking stocks showed signs of recovery in the US too, with Wall Street giants posting gains around midday on Monday. JP Morgan was up 0.6 per cent, Morgan Stanley 1.6 per cent and Goldman Sachs 1.9 per cent.
Things were more mixed amongst regional lenders. PacWest Bancorp climbed 7.7 per cent while Western Alliance Bancorp fell 6.6 per cent. The KBW US banking index climbed 1.0 per cent.
First Republic was down 15 per cent having had its debt downgraded over the weekend for the second time in a week. The bank faces big unrealised losses on both its bond portfolio and its low-yielding mortgage backed securities.
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